Capitol Federal Financial, Inc. Reports Third Quarter Fiscal Year 2013 Results

TOPEKA, Kan., July 29, 2013 /PRNewswire/ -- Capitol Federal® Financial, Inc. (NASDAQ: CFFN) (the "Company") announced results today for the quarter ended June 30, 2013.  Detailed results will be available in the Company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2013, which will be filed with the Securities and Exchange Commission ("SEC") on or about August 5, 2013 and posted on our website, http://ir.capfed.com.  For best viewing results, please view this release in Portable Document Format (PDF) on our website.

Highlights for the quarter include:

• net income of $18.0 million,
• basic and diluted earnings per average share outstanding of $0.13,
• net interest margin of 1.96%,
• repurchased 1,467,214 shares of common stock at an average price of $11.84 per share, and
• paid dividends of $10.8 million.

Comparison of Operating Results for the Quarters Ended June 30, 2013 and March 31, 2013

Net income increased $280 thousand, or 1.6%, from $17.7 million for the quarter ended March 31, 2013 to $18.0 million for the quarter ended June 30, 2013.  The net interest margin decreased one basis point, from 1.97% for the prior quarter, to 1.96% for the current quarter.  Loan and security yields decreased as continued downward pressure persisted, while decreases in the rates on the certificate of deposit portfolio and Federal Home Loan Bank ("FHLB") borrowings eased funding costs. 

Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased seven basis points from the prior quarter to 3.26% for the current quarter and the average balance of interest-earning assets increased $46.5 million between the two periods.  The increase in the weighted average balance between the two periods was primarily in the loan portfolio.

The following table presents the components of interest and dividend income for the time periods presented, along with the change in dollars and percent.  The decrease in interest income on mortgage-backed securities ("MBS") and loans receivable was due primarily to a decrease in the weighted average yield of each portfolio.

The decrease in interest income on loans receivable was due to an eight basis point decrease in the weighted average yield of the portfolio to 3.93% for the current quarter, partially offset by an $83.7 million increase in the average balance of the portfolio.  The decrease in the weighted average yield was due to the continued downward repricing of the existing portfolio resulting primarily from endorsements and refinances, as well as to the origination and purchase of loans at rates less than the weighted average rate of the existing portfolio.  

The decrease in interest income on MBS was due primarily to a 12 basis point decrease in the average yield of the portfolio, from 2.50% for the prior quarter to 2.38% for the current quarter, as well as to a $54.8 million decrease in the average balance of the portfolio.  The decrease in the average yield of the portfolio was due primarily to purchases of MBS during the prior quarter with yields less than the average yield on the existing portfolio, as well as to adjustable-rate MBS repricing to lower market rates.  The decrease in the average balance was due primarily to principal repayments being invested into the higher yielding loan portfolio.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased 11 basis points from the prior quarter to 1.55% for the current quarter and the average balance of interest-bearing liabilities increased $60.1 million between the two periods.  The increase in the average balance of interest-bearing liabilities between the two periods was primarily in the deposit portfolio.

The following table presents the components of interest expense for the time periods presented, along with the change in dollars and percent.  The decrease in interest expense on FHLB borrowings and deposits was due primarily to a decrease in the weighted average rate paid on the portfolios, while the decrease in interest expense on repurchase agreements was due to a decrease in the average balance of the portfolio. 

The weighted average rate paid on the FHLB borrowings portfolio decreased 21 basis points, from 2.87% for the prior quarter to 2.66% for the current quarter.  The decrease in the weighted average rate paid on FHLB borrowings was due primarily to the maturity of $225.0 million of advances during the quarter which were replaced with lower rate borrowings.  Of the $225.0 million of advance maturities during the current quarter, $125.0 million was funded with new FHLB advances and $100.0 million was funded with the FHLB line of credit as management evaluated borrowing options and related strategies.  In late July 2013, the $100.0 million FHLB line of credit was replaced with a $100.0 million repurchase agreement with a term of 84 months at a rate of 2.53%.

The decrease in the weighted average rate paid on the deposit portfolio was due primarily to a decrease in the weighted average rate paid on the certificate of deposit portfolio.  The weighted average rate paid on the certificate of deposit portfolio decreased six basis points, from 1.37% for the prior quarter to 1.31% for the current quarter. 

The decrease in the average balance of the repurchase agreements portfolio was due to the maturity of $50.0 million of agreements late in the prior quarter, as well as to the maturity of $25.0 million of agreements during the current quarter.  These matured agreements were replaced with FHLB borrowings.

Provision for Credit Losses
Capitol Federal Savings Bank (the "Bank") recorded a negative provision for credit losses during the current quarter of $800 thousand compared to no provision for credit losses recorded during the prior quarter.  The overall performance of our loan portfolio continued to improve during the current quarter, as evidenced by the decline in net charge-offs and delinquencies.  Net charge-offs during the current quarter were $33 thousand compared to $405 thousand in the prior quarter.  Loans 30 to 89 days delinquent decreased $4.2 million, or 17.0%, from $24.8 million at March 31, 2013 to $20.6 million at June 30, 2013.  Non-performing loans remained relatively unchanged quarter-over-quarter.

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change in dollars and percent.

The increase in retail fees and charges was due primarily to an increase in debit card income, due in part to seasonality.  The decrease in insurance commissions was due largely to a decrease in the amount of annual commissions received from certain insurance providers, as compared to the prior quarter. 

Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change in dollars and percent.

The increase in advertising and promotional expense was due primarily to the timing of media campaigns.  The increase in other non-interest expense was due primarily to a $272 thousand increase in other real estate owned ("OREO") operations expense, from $32 thousand for the prior quarter, partially offset by a higher recovery of valuation allowance expense on the mortgage-servicing rights asset, primarily as a result of a decrease in prepayment speeds as market interest rates increased.  Over the past 12 months, OREO properties were owned by the Bank, on average, for approximately five months before they were sold. 

Income Tax Expense
Income tax expense was $9.4 million for the current quarter compared to $9.3 million for the prior quarter.  The effective income tax rate for the current quarter was 34.4% compared to 34.5% for the prior quarter. 

Comparison of Operating Results for the Nine Months Ended June 30, 2013 and 2012

For the nine month period ended June 30, 2013, the Company recognized net income of $53.3 million, compared to net income of $56.8 million for the nine month period ended June 30, 2012.  The $3.5 million, or 6.2%, decrease in net income was due primarily to a decrease in net interest income and an increase in non-interest expense, partially offset by a decrease in income tax expense and provision for credit losses.  The net interest margin decreased three basis points, from 2.01% for the prior year nine month period to 1.98% for the current nine month period.  Decreases in the cost of funds and a shift in the mix of interest-earning assets from relatively lower yielding securities to higher yielding loans tempered the decrease in the net interest margin, but were not enough to fully offset the impact of decreasing asset yields. 

Interest and Dividend Income
The weighted average yield on total interest-earning assets decreased 26 basis points from the prior year nine month period to 3.34% for the current nine month period and the average balance of interest-earning assets decreased $160.2 million from the prior year nine month period.  The decrease in the weighted average balance between the two periods was primarily in the lower yielding investment securities portfolio, while the average balance of the loan portfolio increased between the two periods.

The following table presents the components of interest and dividend income for the time periods presented, along with the change in dollars and percent.  The decrease in interest income on MBS and loans receivable was due primarily to a decrease in the weighted average yield of each portfolio, while the decrease in interest income on investment securities was due primarily to a decrease in the average balance of the portfolio.

The average yield on the loans receivable portfolio decreased 52 basis points, from 4.55% for the prior year nine month period to 4.03% for the current nine month period.  The decrease in the weighted average yield was due to the continued downward repricing of the existing portfolio resulting primarily from endorsements and refinances, as well as to the origination and purchase of loans at rates less than the weighted average rate of the existing portfolio.  The decrease in interest income on loans receivable resulting from the decrease in the average yield was partially offset by a $476.6 million increase in the average balance of the portfolio, which was primarily a result of loan purchases between periods.

The average yield on the MBS portfolio decreased 47 basis points, from 2.96% during the prior year nine month period to 2.49% for the current nine month period.  The decrease in the average yield was due primarily to purchases of MBS between periods with yields less than the average yield on the existing portfolio.  Additionally, the average balance of the MBS portfolio decreased $158.9 million between the two periods due to maturities that were invested into higher yielding loans.

The decrease in interest income on investment securities was due primarily to a $432.3 million decrease in the average balance of the portfolio, of which $220.2 million related to securities held at the holding company level.  The cash flows from calls and maturities of investment securities that were not reinvested into the portfolio were used largely to fund loan growth, pay dividends to stockholders, and repurchase stock.

Interest Expense
The weighted average rate paid on total interest-bearing liabilities decreased 33 basis points from the prior year nine month period to 1.64% for the current nine month period and the average balance of interest-bearing liabilities increased $68.2 million from the prior year nine month period.  The increase in the average balance of interest-bearing liabilities was largely in lower rate deposit products while the average balance of certificates of deposit decreased between the two periods.

The following table presents the components of interest expense for the time periods presented, along with the change in dollars and percent.  The decrease in interest expense on FHLB borrowings and deposits was due primarily to a decrease in the weighted average rate paid on the portfolios, while the decrease in interest expense on repurchase agreements was due primarily to a decrease in the average balance between the two periods.

The weighted average rate paid on the FHLB borrowings portfolio decreased 54 basis points, from 3.35% for the prior year nine month period to 2.81% for the current nine month period.  The decrease in the average rate paid was due primarily to the renewal of maturing advances between periods to lower rates.  The decrease in the weighted average rate paid on the deposit portfolio was due primarily to a decrease in the weighted average rate paid on the certificate of deposit and money market portfolios as the portfolios continued to reprice to lower rates.  The weighted average rate paid on the certificate of deposit portfolio decreased 29 basis points, from 1.65% for the prior year nine month period to 1.36% for the current nine month period.  The weighted average rate paid on the money market portfolio decreased 12 basis points, from 0.33% for the prior year nine month period to 0.21% for the current nine month period.  The decrease in interest expense on repurchase agreements was due primarily to a $51.2 million decrease in the average balance between periods as a result of maturing agreements not being renewed; rather, the agreements were replaced with FHLB borrowings.

Provision for Credit Losses
The Bank recorded a negative provision for credit losses during the current nine month period of $567 thousand, compared to a $2.0 million provision for credit losses for the prior year nine month period.  The change between periods was a result of the improvement in the performance of our loan portfolio, as evidenced by the decline in net charge-offs, loans 30 to 89 days delinquent, and loans 90 or more days delinquent or in foreclosure.  Net charge-offs during the current nine month period were $1.3 million, of which $378 thousand related to loans that were discharged in a prior fiscal year under Chapter 7 bankruptcy that must be, in accordance with Office of Comptroller of Currency ("OCC") regulations, evaluated for collateral value loss, even if they are current.  Net charge-offs during the prior year nine month period were $5.7 million, of which $3.5 million was related to the implementation of a loan charge-off policy during January 2012.  OCC Call Report requirements do not permit the use of specific valuation allowances ("SVAs"), which the Bank was previously utilizing for potential loan losses, as permitted by the Bank's previous regulator.  Loans 30 to 89 days delinquent decreased $3.2 million, or 13.4%, from $23.8 million at June 30, 2012 to $20.6 million at June 30, 2013.  Loans 90 or more days delinquent or in foreclosure decreased $3.1 million, or 14.6%, from $21.6 million at June 30, 2012 to $18.5 million at June 30, 2013. 

Non-Interest Income
The following table presents the components of non-interest income for the time periods presented, along with the change in dollars and percent.

The decrease in retail fees and charges was primarily a result of changes required by the Dodd-Frank Wall Street Reform and Consumer Protection Act that reduced debit card interchange fees and established limits to fees for overdrafts of debit card transactions.  The decrease in loan fees was due primarily to a decrease in servicing fees received from sold loans as a result of a decrease in our sold loan portfolio. 

Non-Interest Expense
The following table presents the components of non-interest expense for the time periods presented, along with the change in dollars and percent.

The increase in salaries and employee benefits expense was due primarily to compensation expense on unallocated Employee Stock Ownership Plan ("ESOP") shares related to the $0.52 True Blue® dividend paid in December 2012, along with stock option and restricted stock grants in May 2012 and September 2012.  The increase in information technology and communications expense was primarily related to maintenance and licensing expenses.  The increase in occupancy expense was due largely to an increase in depreciation expense associated with the remodel of our home office.  The increase in regulatory and outside services was due largely to the timing of fees paid for our external audit and an increase in fees associated with tax preparation services and professional services.  The increase in advertising and promotional expense was due primarily to an increase in media campaigns that were delayed until the current fiscal year.  The decrease in other non-interest expenses was due primarily to a decrease in OREO operations expense, a recovery of valuation allowance expense on the mortgage-servicing rights asset compared to an impairment expense in the prior year, and a decrease in office supplies and related expenses. 

We currently anticipate the following increases in non-interest expenses during the full fiscal year 2013, as compared to the full fiscal year 2012:  (1) a $4.8 million increase in salaries and employee benefits due primarily to an estimated $2.7 million in compensation expense on unallocated ESOP shares as a result of the True Blue® and special year-end dividends paid and $1.4 million resulting from a full year's impact of equity plan awards made in May 2012 and September 2012; (2) a $2.6 million increase in information technology and communications expense and occupancy expense as a result of an increase in licensing and maintenance expenses related to upgrades to our information technology infrastructure and an increase in depreciation expense associated with the remodel of our home office; and (3) a $1.1 million increase in advertising expense, which is due primarily to media campaigns that were delayed until fiscal year 2013.  We currently anticipate that the preceding increases in non-interest expenses will be partially offset by an estimated $2.5 million decrease in other non-interest expenses due primarily to a decrease in OREO operations expense and recoveries of valuation allowance expense on the mortgage-servicing rights asset.

The final ESOP loan payment associated with the shares acquired in our initial public offering in March 1999 will be made on September 30, 2013.  As a result, salaries and employee benefits expense is currently anticipated to decrease approximately $4.5 million in fiscal year 2014, as compared to fiscal year 2013.  Additionally, we do not currently anticipate additional compensation expense on unallocated ESOP shares in fiscal year 2014, which would result in an additional decrease in salaries and employee benefit expense of $3.0 million, when compared to fiscal year 2013.

Income Tax Expense
Income tax expense was $27.6 million for the current nine month period compared to $31.7 million for the prior year nine month period.  The decrease in expense between periods was due primarily to a decrease in pretax income.  The effective tax rate for the current nine month period was 34.1% compared to 35.8% for the prior year nine month period.  The current year rate is lower than the prior year rate due primarily to higher deductible expenses associated with the ESOP in the current year, along with higher tax credits related to our low income housing partnerships.  Additionally, pre-tax income is lower than the prior year, due primarily to the items outlined in non-interest expenses in the "Comparison of Operating Results for the Nine Months Ended June 30, 2013 and 2012" discussion above, which results in all items impacting the income tax rate having a larger impact on the overall effective tax rate than in fiscal year 2012.

The following is a reconciliation of the basic and diluted earnings per share calculations for the periods noted.

Financial Condition as of June 30, 2013

Total assets decreased $138.5 million, from $9.38 billion at September 30, 2012 to $9.24 billion at June 30, 2013, due primarily to a $307.9 million decrease in the securities portfolio, partially offset by a $184.5 million increase in the loan portfolio.  Of the $307.9 million decrease in the securities portfolio, $60.0 million related to securities at the holding company level, the proceeds from which were used to pay dividends to stockholders and repurchase stock.  The remaining cash flows from the securities portfolio which were not reinvested were used, in part, to fund loan growth.  At June 30, 2013, Capitol Federal Financial, Inc., at the holding company level, had $195.6 million on deposit at the Bank.  The net increase in the loan portfolio was due primarily to correspondent one- to four-family loan purchases outpacing principal repayments between periods.  As of June 30, 2013, the Bank had 26 active correspondent lending relationships operating in 23 states. 

Economic conditions in the Bank's local market areas have a significant impact on the ability of borrowers to repay loans and the value of the collateral securing these loans.  As of June 2013, the unemployment rate was 5.8% for Kansas and 6.9% for Missouri, compared to the national average of 7.6% based on information from the Bureau of Economic Analysis.  The unemployment rate remains low in our market areas, relative to the national average, due to diversified industries within our market areas, primarily in the Kansas City metropolitan statistical area.  Our Kansas City market area, which comprises the largest segment of our loan portfolio and deposit base, has an average household income of approximately $79 thousand per annum, based on 2012 estimates from the American Community Survey, which is a statistical survey by the U.S. Census Bureau.  The average household income in our combined market areas is approximately $68 thousand per annum, with 92% of the population at or above the poverty level, also based on the 2012 estimates from the American Community Survey.  The Federal Housing Finance Agency price index for Kansas and Missouri has not experienced significant fluctuations during the past 10 years, unlike other market areas of the United States, which indicates relative stability historically in property values in our local market areas. 

As a portfolio lender focused on delivering outstanding customer service while acquiring quality assets, the ability of our borrowers to repay has always been paramount in our business model.  Although we continue to evaluate the "qualified mortgage" rules issued by the Consumer Financial Protection Bureau, we currently anticipate that the impact to our overall book of business will generally be minimal. 

The following table presents delinquent and non-performing loans, OREO, allowance for credit losses ("ACL") and related ratios as of the dates shown.  In accordance with the OCC Call Report requirements, troubled debt restructurings ("TDRs") that were either nonaccrual at the time of restructuring or did not receive a credit evaluation prior to the restructuring and have not made six consecutive monthly payments per the restructured loan terms are reported as nonaccrual loans.  During July 2012, the OCC provided guidance to the industry regarding loans that had been discharged under Chapter 7 bankruptcy proceedings where the borrower has not reaffirmed the debt owed to the lender.  The OCC requires that these loans be reported as TDRs and nonaccrual, even if they are current.  Our balance of loans 90 or more days delinquent or in foreclosure continues to improve; however, implementation of the above noted OCC guidance has kept our balance of non-performing loans elevated.  The principal balance of loans required by the OCC to be reported as nonaccrual, even if they are current, was $7.9 million, $12.4 million, and $4.2 million at June 30, 2013, September 30, 2012, and June 30, 2012, respectively.

Total liabilities increased $43.4 million, from $7.57 billion at September 30, 2012, to $7.62 billion at June 30, 2013 due primarily to an $81.2 million increase in FHLB borrowings and a $77.8 million increase in deposits, partially offset by the maturity of $75.0 million of repurchase agreements between period ends.  The matured repurchase agreements were replaced by FHLB borrowings.  The increase in the deposit portfolio was due primarily to a $58.0 million increase in the checking portfolio, a $28.7 million increase in the money market portfolio, and a $21.2 million increase in the savings portfolio, partially offset by a $30.1 million decrease in the certificate of deposit portfolio.  The decrease in the certificate of deposit portfolio was due to retail deposits, partially offset by an increase in wholesale deposits, specifically public unit deposits.  The decrease in the retail certificate of deposit portfolio was due primarily to certificates with terms of 30 months or less, while the balance of certificates with terms 36 to 60 months increased.

Stockholders' equity decreased $182.0 million, from $1.81 billion at September 30, 2012 to $1.62 billion at June 30, 2013.  The decrease was due primarily to the payment of $136.1 million of dividends and the repurchase of $89.4 million of stock, partially offset by net income of $53.3 million.  Additionally, accumulated other comprehensive income ("AOCI") decreased $16.9 million from September 30, 2012 to June 30, 2013 due to a decrease in unrealized gains on available-for-sale ("AFS") securities as a result of the recent increase in market yields.  The $136.1 million of dividends paid during the current nine month period consisted of a $0.52 per share, or $76.5 million, True Blue® dividend, an $0.18 per share, or $26.6 million, special year-end dividend related to fiscal year 2012 earnings per the Company's dividend policy, and three regular quarterly dividends of $0.075 per share each quarter, totaling $0.225 per share, or $33.0 million.  On July 17, 2013, the Company declared a regular quarterly cash dividend of $0.075 per share, or approximately $10.7 million, payable on August 16, 2013 to stockholders of record as of the close of business on August 2, 2013.  Dividend payments depend upon a number of factors including the Company's financial condition and results of operations, the Bank's regulatory capital requirements, regulatory limitations on the Bank's ability to make capital distributions to the Company, and the amount of cash at the holding company.  At June 30, 2013, Capitol Federal Financial, Inc., at the holding company level, had $195.6 million on deposit at the Bank.

In December 2011, the Company announced that its Board of Directors approved the repurchase of up to $193.0 million of the Company's common stock.  The Company began repurchasing common stock during the second quarter of fiscal year 2012 and completed the plan during the second quarter of fiscal year 2013, having repurchased 16,360,654 shares at an average price of $11.80 per share.  In November 2012, the Company announced its Board of Directors approved a new $175.0 million stock repurchase program, which has no expiration date, to commence upon the completion of the aforementioned $193.0 million repurchase plan.  As of June 30, 2013, 3,826,644 shares had been repurchased under the new plan at an average price of $11.85 per share, at a total cost of $45.4 million.  There were no shares repurchased subsequent to June 30, 2013 through the date of this release.

The following table presents the balance of stockholders' equity and related information as of the dates presented.

The following table presents a reconciliation of total and net shares outstanding as of June 30, 2013. 

Consistent with our goal to operate a sound and profitable financial institution, we actively seek to maintain a "well-capitalized" status for the Bank in accordance with regulatory standards.  As of June 30, 2013, the Bank exceeded all regulatory capital requirements.  The following table presents the Bank's regulatory capital ratios at June 30, 2013 based upon regulatory guidelines.

A reconciliation of the Bank's equity under accounting principles generally accepted in the United States of America ("GAAP") to regulatory capital amounts as of June 30, 2013 is as follows (dollars in thousands):

Capitol Federal Financial, Inc. is the holding company for the Bank.  The Bank has 46 branch locations in Kansas and Missouri.  The Bank is one of the largest residential lenders in the State of Kansas.  News and other information about the Company can be found on the Internet at the Bank's website, http://www.capfed.com.

Except for the historical information contained in this press release, the matters discussed may be deemed to be forward-looking statements, within the meaning of the Private Securities Litigation Reform Act of 1995, that involve risks and uncertainties, including changes in economic conditions in the Company's market area, changes in policies by regulatory agencies and other governmental initiatives affecting the financial services industry, fluctuations in interest rates, demand for loans in the Company's market area, the future earnings and capital levels of Capitol Federal Savings Bank, which would affect the ability of the Capitol Federal Financial, Inc. to pay dividends in accordance with its dividend policies, competition, and other risks detailed from time to time in documents filed or furnished by Capitol Federal Financial, Inc. with the SEC.  Actual results may differ materially from those currently expected.  These forward-looking statements represent Capitol Federal Financial, Inc.'s judgment as of the date of this release.  Capitol Federal Financial, Inc. disclaims, however, any intent or obligation to update these forward-looking statements.

Supplemental Financial Information

Loan Portfolio

The following table presents information related to the composition of our loan portfolio in terms of dollar amounts and percentages (before deductions for undisbursed loan funds, unearned loan fees and deferred costs, and ACL) as of the dates indicated.  The average rate of the portfolio decreased 29 basis points from September 30, 2012 and 51 basis points from June 30, 2012, to 3.86% at June 30, 2013.  The decrease in the average rates from September 30, 2012 and June 30, 2012 was due primarily to the endorsement and refinance of loans at current market rates, as well as to the origination and purchase of loans between periods with rates less than the average rate of the existing portfolio.

The following table presents the balance, percentage of total one- to four-family loans, weighted average credit score, loan-to-value ("LTV") ratio, and the average balance per loan for our portfolio of one- to four-family loans at the dates presented.  Credit scores are updated at least semiannually, with the last update in March 2013, and obtained from a nationally recognized consumer rating agency.  The LTV ratios were based on the current loan balance and either the lesser of the purchase price or original appraisal, or the most recent bank appraisal or broker price opinion.  In most cases, the most recent appraisal was obtained at the time of origination.